Dump the Minimum Wage and Adopt the Free Wage

Dump the Minimum Wage and Adopt the Free Wage
August 19, 2013

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)

Let us thank the union- and taxpayer-backed Restaurant Opportunities Center, which this month has been launching protests around the nation to demand a minimum wage of $15 an hour for restaurant workers. They’ve presented us with a great opportunity to discuss the many reasons the minimum wage is not only bad economics but an affront to freedom.

 

First, some facts from the U.S. Bureau of Labor Statistics:

 

1. The national unemployment rate for persons 18 to 29 years old topped 16 percent in July, more than double the overall unemployment rate of 7.4 percent.

 

2. Among black youth ages 18 to 29, the unemployment rate was 20.9 percent, nearly three times higher than the overall rate.

 

And those figures don’t include persons who want jobs but are so frustrated they’ve given up looking.

 

Blame the minimum wage for much of this. Young and inexperienced workers typically are the least productive. If they are poorly educated—as many young urban minorities are—they are even less productive. So they typically receive the lowest pay. As they learn more, develop better work habits and become more skilled, they become more productive and earn pay raises or have the ability to switch to higher-paying jobs.

 

No employer could stay in business long with a staff whose productivity averages $5 an hour while they receive the federal minimum wage of $7.25 an hour or higher. More than doubling the minimum wage would throw even more young, inexperienced, and poorly educated persons out of work, because they’d be costing employers far more than they produce.

 

Imagine what would happen if the government set a minimum price on cars. No matter what car you wanted to buy, you’d have to pay at least $40,000. We’d soon see only higher-end cars sold and the disappearance of lower-end cars. No one would want to pay $40,000 for a $20,000 car. And we’d see fewer cars sold overall because fewer people would have the money to buy cars that start at $40,000.

 

With a minimum wage, employers try to hire only higher-end workers—those with experience, skills, and education—instead of those with little or no experience, low skills, and poor education.

 

Proponents say restaurants could raise prices to cover the doubling of the minimum wage, but fewer meals would be sold, and fewer jobs would be available, because people would be spending more per meal and therefore could afford fewer meals.

 

Barely 5 percent of the workforce receives the minimum wage or less (there are some exceptions to the minimum wage rules). Nearly all restaurant customers would see they’ve been harmed by the minimum wage increase by being forced to pay more for meals.

 

Let’s change our little automotive thought experiment. Imagine an amazing manufacturing breakthrough enables Ferrari, Lamborghini, Porsche, and other makers of high-end cars to sell them for $1,000 instead of hundreds of thousands of dollars. It’s a safe bet a lot more of us would be driving Ferraris, Lamborghinis, and Porsches.

 

Now imagine there is no minimum wage. None. Imagine eager and inexperienced people willing to work for $5 an hour, and employers who have jobs in which they would produce enough to cover that $5. It’s a safe bet we’d see a lot more eager and inexperienced people working, learning on the job, becoming more productive, and able to win raises or move to higher-paying jobs.

 

Minimum wage laws have nothing to do with labor supply or demand or the productivity of a job, and they infringe on freedom. If someone wants to work for $5 an hour and an employer wants to pay that amount, they should be free to strike the deal.

 

Instead, government forces the person to stay unemployed and the employer to leave a job unfilled.

 

Instead of supporting minimum wages, we should support free wages—the freedom to decide for ourselves what wage we’ll accept to do a job. This would do more than anything to reduce the frustration and misery of unemployment.

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)